What to Know About Improvement Exchanges

The Improvement Exchange allows a taxpayer to use exchange proceeds to improve existing property or to improve unimproved property.

The taxpayer will first sell their relinquished property as part of a standard delayed exchange. At the closing of the sale, the proceeds will be deposited with Security 1st Exchange as their Qualified Intermediary (QI). From the closing of the sale, the taxpayer has 45 calendar days to identify their replacement property. Through this identification process, they must also identify the improvements to be made to the property through the 1031 exchange process. The QI will then create an Exchange Accommodation Titleholder (EAT). This EAT will be assigned into the purchase agreement as the buyer and will take title to the replacement property at the closing of the transaction. The QI will then disburse funds to vendors to complete the identified improvements. Upon the completion of the improvements, or at the end of the exchange period, the EAT will transfer title of the property to the taxpayer.

As with any exchange, a taxpayer should consult with their counsel or tax professional before considering an improvement exchange. Please reach out to the professionals at Security 1st Exchange for more information.

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Basics of a 1031 Exchange

To structure a 1031 Exchange property under I.R.C. Section 1031, there are some basic requirements that a taxpayer must meet.

Closing Costs

There are always questions from taxpayers as to which closing costs can be paid with sales proceeds when doing a 1031 Exchange. This article provides some overall guidance on the topic.

1031 Disclosure

The IRS requires that if any party to a transaction wishes to do a 1031 Exchange, all parties to the closing are made aware. The best place to do this is in the purchase and sale agreement.

Identification Rules

Section 1031 requires that a taxpayer doing an exchange identify their replacement property while following certain rules.